July 14, 2024


Make Every Business

Is the Letter of Intent a Worthless Document?

Is the Letter of Intent a Worthless Document?

A Letter of Intent (LOI) is a common way to express your intentions to purchase a property without having to write a formal, legal binding contract. The Letter of Intent is presented to a seller in the very preliminary stages of a project. The intentions of a buyer are spelled out clearly and simply so the seller knows exactly how the buyer wants to purchase the property, and under what terms. Essentially a Letter of Intent is to open a dialogue and create a framework for that dialogue between buyers and sellers.

Definition of a Letter of Intent

“A Letter of Intent is basically a written statement expressing the sender’s intention, should certain circumstances arise, to take or forgo some action, like entering into a future agreement with the recipient, or, more generally, carrying out business activities mentioned in the Letter of Intent.”

I often submit a LOI right after I have found a building, quickly analyzed the operating numbers and recognized that a deal could be created. This whole process might be as a short of a time as 30 minutes. I want the seller to recognize me as having a serious interest in the building and not just a ‘tire-kicker”. The sooner he knows he potentially has a viable sale of his property, the sooner he may stop fielding calls and inquiries from others. In other words, his attention will be focused on the dialogue with me.

The letter of intent in the offer process

This Letter of Intent is not a traditional letter. You do not write it and forget it. It is a living document that should be updated and added to on a regular basis throughout the offer process. In the offer and purchase process, the letter of intent tells the property seller that you are interested not only in submitting a proposal to purchase, but in response also receiving all LOI updates and modifications. The LOI is an agreement to agree in the future. Once the Investor and the seller have come to the meeting of the minds via the LOI, a formal Purchase Contract would be written.

If the letter of intent is accepted, then the due diligence period will begin. It will continue until the time agreed upon by both parties in which, at the end of the term, a binding contract is constructed. Terms may change during this time if certain aspects of a property, previously not disclosed, are discovered. For example, there may be soil contamination in which the buyer will not want to purchase the property and will safely option out of the non-binding contract. Or, perhaps the property is in a lot worse condition than originally thought, causing the buyer to negotiate a decreased purchase price.

If not binding is the letter of intent is a worthless document?

A letter of intent is not an offer or a contract. It doesn’t commit you or the seller to the project. In other words, it cannot be enforced. Often in the LOI there is often times, at the bottom or, in the body a paragraph stating and reinforcing the non-binding character of the LOI.

This should be a basic understanding of the nature of the LOI. This language is
usually just re-enforcement inserted to let all who may read that it is not a binding document, nor an agreement to agree in the future, unless specifically written.

The Specific details of due diligence, cash flow and the buyers’ needs, how those terms will be carried out with sellers. In most of the initial presentations, the accommodation of the seller’s financial needs is what is addressed. As a result the focus becomes more about the seller’s than the buyer’s needs.

For this reason, the dialogue is broken off, and the proposed purchase falls by the way side.

When the needs of the buyer and seller are addressed up front, it helps insure a movement to contract. s are spelled out in the . Buyers are often disappointed when their deals die at the LOI stage, with emotion aside, the understanding of the nature of the LOI, it is only a tool to open dialogue to see if an acceptable deal can be created. This allows the buyer to focus on the next viable deal. So in the regard the LOI is a very worthwhile document.

Writing the Letter of Intent

Use a formal letterhead and do not handwrite the letter of intent. A letter of intent must have five basic elements in its content:

1. The Seller’s or the Seller’s Agent’s name
2. The buyer’s name
3. The property address and description
4. Your offer details, which includes:
a. Purchase price
b. Down payment
c. Financing
d. Terms
e. Due diligence conditions
5. Time frame.

The body of the LOI would address the following items;

Terms: We should spell out the offering price, and the specific terms and contingencies of the financing, the down payment, where and what kind of financing to be obtained.

Conditions: We will often use this portion of the LOI to request documentation regarding the performance of the property, such as financials or other items that may aid us in our Due Diligence.

Due diligence time: specific time frame for consummation-typically about 90 to 120 days-or a so-called “drop dead” date by which the deal must be finished and the Buyer should have its due diligence completed, financing in place and ready to close escrow.

Closing Date: The specific date by which you can complete all of the due diligence and arrange for funding and any other clauses or provisions. When a formal contract will be written up if the LOI is approved if elected, a clause that makes the LOI non-binding. State to the seller that you are, interested in being kept informed about any modification related to this property, i.e. the LOI document itself, essentially an invitation for response.

Conclusion: Your signature and a place for the seller’s signature: close the letter formally with “sincerely” or a similar polite expression. Sign your name and title. Be sure to provide correct, complete contact and reference information for future correspondence. Remember to consult your lawyer, Tax advisor and other counsel for further information before entering into the formal contract.